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When Chicago Cubs Owner and Chairman Tom Ricketts spoke to the media this past weekend, he touched on a variety of things: the expectations for 2013, the future TV home of the Cubs, the status of talks with the City on the Wrigley Field renovation, and more.

For me, all of the topics coalesced into a singular focal point: what is the Cubs’ payroll going to look like going forward?

We’ve seen the Cubs’ payroll trending downward during the Ricketts Family’s ownership. $135 million in 2009 (just before they took over), $144 million in 2010, $134 million in 2011, $109 million in 2012, and a projected $95 to $100 million in 2013. Are we to expect this trend to continue? Are we to expect that the Ricketts Family is going cheap?

Well, no and no.

“You’re kind of comparing [recent payrolls] to the Tribune payrolls of the last couple years,” Ricketts told the media, including CSN, when asked about the payroll trend. “Which, from our standpoint and from the team’s standpoint were just unsustainable. But what I can say is that it’s a closed system. Every dollar does stay in the baseball organization.”

That is to say, the Ricketts Family isn’t pocketing the “saved” cash from payroll reduction. Instead, payroll was artificially inflated by an organization looking to pump the Cubs up in advance of a planned sale, and payroll is coming back down to a “sustainable” level.

But, even if that’s the explanation, that’s not, like, a good thing, right? If $100 to $110 million is the sustainable level for the Cubs right now, are they doomed to being a middle-market spender despite being a large market team?

Once again, no, according to Ricketts.

“That’s why it’s so important when we have these discussions about how you improve the field,” Ricketts went on, “to make sure that you’re really representing … the fans in terms of trying to make sure that we get the financial resources of the team to be as large as they can be.”

In other words: those higher payroll levels will be doable, but only after the Cubs increase their financial resources.

If you still needed further emphasis that the Wrigley renovation story and the TV deal story are *the* most important stories in the Cubs’ world right now, there you go. Get those two things done, and more money goes into payroll. With additional revenue from a renovated Wrigley Field (to say nothing of, eventually, additional revenue coming from those renovation funding mechanisms (increased ad signage, more night games, more concerts, and street fairs)), and from a renegotiated television contract (the Cubs’ agreement with WGN-TV for a portion of their games ends after 2014, and with CSN ends after 2019), “high” payroll becomes “sustainable.”

Ricketts has been adamant that every dollar that comes in the door is going right back into the organization, and he says that getting payroll up is going to be predicated on increased revenue from the fruits of the renovation and the new TV deal. It is plausible that the Tribune was outspending its revenue levels in an effort to drive up the Cubs’ sale price back in 2007 and 2008 (and, more to the point, backloading contracts it could pass on to the next owner). If true, the Cubs need more revenue to sustain a consistently higher payroll level. There’s a whole lot of fudging available in this discussion, but it passes the smell test for me.

Subject to one big caveat.

There is one question that has lingered for me for quite some time, as we look at the financial story of the Chicago Cubs under the Ricketts’ ownership. When the family bought the Cubs, a sizable portion of the purchase was financed – which is to say, the family borrowed money to complete the purchase. They now owe regular payments toward that debt.

So, the lingering question: When Ricketts says “every dollar does stay in the baseball organization,” does he consider money used to pay down the family’s Cubs-related purchase debt as staying “in the baseball organization”?

If so, he shouldn’t.

The Cubs don’t own the Cubs, and the Cubs don’t hold debt on the purchase of the Cubs. The Ricketts Family owns the Cubs, and holds the debt on the purchase of the Cubs. When the Ricketts Family bought the Cubs, it was not unlike buying a house: they made a down payment, and borrowed the rest (like a mortgage). If you are paying down a mortgage on your house, and someone gives you $10,000 to put toward the mortgage, is that money going into the house, or into your pocket? It’s clearly the latter, because that $10,000 does not impact the value of the house. But it does save you $10,000 that you otherwise would have had to pay. Maybe this is an overly simplistic comparison, but it makes sense to me.

To be clear: I’m not going to lose my stuff if some of the revenue coming into the Cubs is being used to pay down the debt that the Ricketts Family took on in order to purchase the Cubs. But, if that is happening, I would like them to be transparent about it. Because, in that situation, Cubs revenue is being used to increase Ricketts Family wealth (by turning their debt into equity), which isn’t quite consistent with the “every dollar goes back into the organization” narrative.

Again, I’m not saying that would be morally wrong or anything (it’s their team). I’m just saying that it would be important to know if that’s happening, if we’re to credit those “every dollar is going back into the organization” statements. And, frankly, it would help answer questions folks have about the dropping payroll. If revenue in the last three years has been going to pay down the debt, and if the Ricketts Family wasn’t going to go into its own pockets to sustain operations, then of course the payroll was going to decline. That’s just math, and it doesn’t even consider attendance declines.

Ultimately, however, what matters right now are the Wrigley renovation and the new TV deal. With each taken care of, the Cubs’ revenues will increase substantially. And, in turn, payroll will increase substantially – at least insofar as Theo and Jed decide they need it.

It’s too bad the new CBA snuffed the plans of the FO with the limitation spending on International players. I’m sure we would have acquired a mass quantity of assets.

http://www.bleachernation.com Brett

And the Draft. I tend to think we would have seen the Cubs spending in the top three teams in the Draft and internationally each year for, like, a half decade.

EvenBetterNewsV2.0

Even if they could have been around for the last 10 years to do that. There have been some solid drafts. We could have been spending $10-$12 million every year on drafts.

Eric

Good point regarding whether Rickett’s considers paying down the debt to be money being put back into the baseball operation – I hope not but am very curious.

I highly doubt a member of the media will ask such a specific question so that might be one to bring up at the Rickett’s panel at the next Cubs Convention.

Hopefully the Cubs are able to have restrictions lifted so it becomes moot.

Dan W

When he says what money comes in the door, goes right back into the Cubs, maybe he means that literally. Tickets prices, concession, current ball park advertising etc… But what about MLB’s TV contract money, apparel money, etc….That’s not coming “in the doors”, so maybe that’s the only thing being counted as coming through the door???

AP

I guess I’m not as upset at the thought of Ricketts using it to pay down debt – granted I used to be a banker, so I’m probably biased. Instead of a house, I think of it more like an apartment complex or business offices – revenue generated from those ventures absolutely go toward paying down the mortgage on the property. Also, the more they pay down now, the less interest they have to pay later which frees up those future cash flows for capital expenditures and things like payroll. The current construction of the team also colors my view because I feel lik eit would take a ton of payroll to make the team competitive and I think it’s just better to but that money to a use that makes the team more sustainable in the future. So, since the Cubs are still a business instead of just a personal asset that has no operational value, I guess I’m more forgiving. That is, of course, assuming that once they pay down the debt some and get the team on the field where they want it to be, they will start spending that money on fielding a good team. If they just start cutting payroll and going all royals on us, then I have a problem.

http://www.bleachernation.com Brett

You’ll note I didn’t say I was upset by the setup – exactly the opposite.

But, to my mind, it is disingenuous to say that every dollar the Cubs earn is being put back into the franchise *IF* some of it is being used to pay down Ricketts Family debt (because then it is being used to “purchase” the Cubs, which the Ricketts Family owns, and someday could sell).

Again: I am not saying it’s wrong or unfair for the Ricketts to conduct the business this way – every owner of every business would.

AP

Excellent point – it’s like you’ve had some kind of training analyzing and interpreting words and phrases. You sir, are good at your job! I respectfully withdraw my use of the word “upset” and claim it was merely a slip of the tongue caused by my rush to enjoy more BleacherNation before I had to run and catch a bus. Never lose your cat (pajama) like verbal prowess!

http://www.bleachernation.com Brett

Winky face.

DarthHater

It may not be unfair, but frankly, I don’t give a rat’s backside what’s fair or unfair to the Ricketts. I’m a Cubs fan and what I care about is that the owners do everything feasible to win a World Series. Sure, owners have no legal obligation to do that. But if they don’t, then fans of the team can’t be expected to like it or to keep quiet about it.

I don’t think the current payroll is evidence of cheapness, so I don’t join those who come here and rant that the Ricketts are lining their own pockets without any evidence to back that up. But if there is evidence in the future that revenue generated by the Cubs is being used in any way to contribute to the owners’ personal wealth and the Cubs have not yet won a World Series, I’ll definitely have my torch and pitchfork ready.

JoeyCollins

If the rickeetts are smart, which i believe they are, they realize that nothing will contribute more to their family fortune than a winning team. A consistantly good Cubs team will bring in more money than they could ever squeeze out of a bad one.

Mick

This is true and eventually we’d get there. But a quicker road to a winning team is spending money on better players but how can you spend money on better players if you don’t have any more money to spend?

DarthHater

Uh-oh, I think Mick just proved that it is logically impossible to build a winning team… 😛

Mick

If you don’t eat yer meat, you can’t have any pudding. How can you have any pudding if you don’t eat yer meat?

DarthHater

But I LOVE pudding!!!

frank

We don’t need no education . . .

JoeyCollins

I think that depends on what you consider a “winning team.” Is it the Tribunes definition of making the playoffs on inflated payroll? I really just don’t think these owners are focusing on quick results. Everything they do is geared towards long term, sustained, success.

Mick

I agree but just didn’t want to dismiss the Ricketts as being stupid for trying to generate more revenue to be put back into the baseball organization. The simple solution is to win but probably the best solution is to try and win and to try and squeeze dollars out of dimes.

JoeyCollins

Just a question but do the Ricketts, as in the kids who own and operate the Cubs, and not Joe, have much additional income? I don’t know either way. I have no clue what investments or other sources of income they might have, i’m sure there is atleast some, but is it enough to pay down the debt of purchasing the Cubs. If not then I guess I look at it the same as the rental property idea, where the debt acquired for purchase is going to have to be paid for by income from the property.

Marc N.

Am I the only one not really worried about long term payroll? Seems like they just don’t want to artificially inflate payroll so early into this little pet project of rich men. I fully expect the Cubs to “play with the big boys” in the long term. In the 2020s and maaaaaybe even the later half of this decade I think they’ll be one of those teams pushing the luxury tax.

The Dude Abides

Winning will take care of all ills from a financial standpoint. Fans will COME to the games and spend money on concession and souvenir’s. Advertisers will pay top dollar so the fans both on TV and at the stadium see their advertising, TV contract will be maximized if they are a winning due to increased ratings, on and on. They cannot go into 2014 asking everyone to trust them on come. The timing is too critical with TV and stadium deals well under way. Hopefully they take steps this season to solidify their future and not hold a fire sale the last two months.

MightyBear

I’d almost guarantee that the money paying down the note on the team is coming out of the P&L which is the Chicago Cubs but that is exactly what the Ricketts should do. I believe the Ricketts want the Cubs to win a championship but they also want to increase the value of their business and make as much money as they can. I don’t see where those two are mutually exclusive. I believe major league payroll is down now because of money being spent in other areas ie increased front office staff, increased scouting and development and increased computer based research. All those things cost money and the money has to come somewhere.

Chad

My thoughts given my professional background:

1- Most likely the “Cubs” are an entity of themselves. The Cubs entity pays rent to the entity which holds Wrigley Field as an asset (let’s call this WF, LLC).

2- Rent being paid to WF,LLC likely a variable amount dependent on net or gross income of the Cubs (or some other factor).

3- WF, LLC uses the rental income to pay down any debt associated with Wrigley Field and pay other misc expense. Net income, if any flows to the Rickett’s Family.

5- I don’t believe the amount being paid in rent is some arbitrary number to quickly pay down loans associated with Wrigley Field. If this was the case there could be some taxation issues.

Take all that for what it is worth….not much.

http://www.bleachernation.com Brett

None of that would surprise me (I saw many setups like that in a previous life). At bottom, though, if a dollar that comes in the door from the sale of a ticket goes – by way of whatever vehicles – to pay down the debt that was used to purchase the Cubs, that dollar is being transferred to the Ricketts Family’s wealth (because now they “own” that additional dollar’s worth of the Cubs).

I got no beef with it, but I would like to know.

Jumbo

Maybe what he means is all “profit” goes back into the team. The debt service would be an expense, just like player salaries and overhead.

Every dollar does not go into the team (as far as spending more on the team). The first dollars go towards paying current expenses. Only after all expenses are paid does profit (and opportunity to expand the payroll, i.e, putting money into the team) start to grow.

http://www.bleachernation.com Brett

“The debt service would be an expense”

An expense of the Ricketts Family, not the Cubs. Because they get the benefit of that expense (they get to own more and more of the Cubs).

MightyBear

The interest would be an expense for the Cubs, the principal would be repayment of the note which would decrease the liability, which would increase the asset and hence increasing the owners equity.

bbmoney

mehhh….it’s all semantics anyways. But it’s the Ricketts family debt not the Cubs. So the interest expense should be the Rickett’s family interest expense too. Not the Cubs.

But again…..all semantics. He’s never going to show the financials to prove all the money is staying with the team anyways. Not saying I don’t believe him, but I don’t really believe anyone when it comes to money….skeptical by nature.

Edwin

Decreasing a liability doesn’t increase the asset. A = L + OE. When the liability is paid down, it’s a decrease in cash, an asset.

MightyBear

Yes and A – L = OE. If L is decreased, OE is increased.

Edwin

Not in your example. If L is decreased, either A is decreased, or OE is increased. In paying off a bond or other LT Liabilitiy, OE doesn’t change.

Mick

Another revenue stream that I haven’t quite put my finger on are the concerts, Northwestern games, hockey games, etc. that take place at Wrigley. Is this considered Cubs revenue? Also, how are the Cubs consistently in the top 5 for attendence in MLB but only can “sustain” a $100 million payroll. I don’t really care what Ricketts does with his money and it’s not like the Cubs are a public company so I understand he doesn’t need to open up his books for anybody. It’s just kind of dopey for him to constantly make public claims that every dollar the Cubs earn stays in the baseball organization and then not give any details to the actual incomes and expenses.

http://worldseriesdreaming.com dabynsky

Just as a point of fact according to baseball reference the Cubs have not been a top five attendance team in the past decade. They are a top five ticket price and consistently finish between 6 and 10 in attendance though.

Chad

Most likely this is not Cubs revenue. I’m sure the Ricketts have another entity set up for such events. That entities revenue would be the ticket sales from the events. They would pay rent to the entitiy that holds Wrigley Field as an asset.

Mick

Yep, and what money was the McDonald’s purchased with and where will those revenues be going? It’s just kind of shady for Ricketts to only use hot dog, beer, and ticket sales to finance his baseball organization when he’s making tens of millions for events at Wrigley, his boutique hotel across the street from Wrigley, the office space leasing in the Triangle Building, etc. That’s what’s so dopey is that Ricketts is portraying the Cubs as an enterprise when in actuality its more of a subsidiary.

Rcleven

Soler hits a HR aginst Struck.

1060Ivy

On large caveat that begs a question:

Several members of Ricketts family have jobs in the Cubs organization does the statement that all the money goes back into the organization, does he include his and family compensation in the ledger for the organization?

If so, it’s a great loophole for the statement.

Still we haven’t heard the old claiming poverty line such as “the organization has been losing money due to: declining ticket sales, concession sales, Wrigley upkeep, etc. Oh year and debt servicing.” Doubt if it will compete with the old Tribune rant that “fans have to understand that Cubs are a middle market team since they compete against the White Sox in the same city”

Pat

Yes, salaries for the board would be part of the operating costs. As would debt service. I don’t know anyone at all who didn’t think the debt service would be coming off the top. How the hell else would they pay it? Joe gave them money for the downpayment, not the entire purchase price.

Edwin

If the salaries are paid for positions that relate to the operations of the Cubs, then they’ll show up as an operating expense on the Cubs’ books.

The Debt service is not related to the Cubs operation, so it would not show up on the Cubs’ books. It would be on the owner’s books, as a non-operating expense.

Pat

Look there is one entity, let’s call it Wrigley LLC (not the name but it doesn’t matter), who owns both the Cubs and the debt associated with the purchase.

No owner ever separates debt service from the team revenue. They use team revenue to pay off the debt. Every owner does this.

http://www.bleachernation.com Brett

Just so we’re clear: This is really a separate conversation from the one at the heart of the post. However the entities are structured, the essence remains: if the Cubs’ operation earns a dollar that ultimately goes to paying down the debt the Ricketts Family used to purchase the team, which grants the Ricketts Family an additional dollar of ownership free and clear, then some Cubs revenue is going to the Ricketts Family’s bottom line, rather than going directly into the operation of the Cubs.

And then to be clear about my clear: I’m not saying this is a bad or wrong thing, and I’m not saying it’s not how every purchased business is run (including sports teams). I’m simply saying it is, at it its core, inconsistent with a “every dollar of revenue goes back into the organization” narrative.

Pat

But if the loan collateral is the team, which I would bet large amounts of money it is, then it is not family debt. It is team debt. The Ricketts are way too smart to have gone into this with any personal liability beyond the down payment. Think of it more like a business taking out a line of credit. Unless the owners are brain dead, they are not personally liable for the repayment, the business is.

http://www.bleachernation.com Brett

That doesn’t matter – that’s the semantics of the business structure, and is not the point I’m making.

Say I buy the Cubs for a downpayment of $100 million, and a bank lent me the rest. I then slash payroll and operating costs, putting every surplus bit of revenue into paying back the bank. I’m so crafty, I do it in just three seasons. At the end of those three seasons, I didn’t put in an additional dime of my own money – just money I got from the Cubs’ revenues. But the debt is wiped clean, and I now own an $800 million asset free and clear, which I sell for $800 million – a tidy $700 million profit for me.

Tell me: did Cubs revenues go into my pockets or not? This is not a finance question. It’s a “let’s be real” question.

Chad

I’m not sure I’m with you your idea of “profit”.

The sale of the property (or value of property) will have nothing to do with how the organization was purchased….financed or paid in cash. The asset would be recorded at its purchase price regardless of financing arrangements. You may have 700 million more in equity after the associated debt is paid for, but this has nothing to with profits and/or gains. The fact of the matter is, is that buy having the debt paid off cash flow is freed up. With increase cash flow the Rickett’s would be able to improve the team (hopefully).
Now – I don’t think you ever had any intentions of this topic being discussed as it has been. We are a bunch of Cubs fans making assumptions about the business structure, debt payments and cash flow. I’d hope that Tom’s intentions are good and that in the long-run the product on the field will get better because Tom’s cash flow and profits are significantly better than when he took over.

http://www.bleachernation.com Brett

The point is, I have $700 million more than I had three years ago.

Spencer

No wonder you quit your job to start a blog.

Hansman1982

Brett is correct here. Regardless of how you set it up a person has to own the cubs. Be it through a company that owns the cubs (and that company has shareholders) or the ricketts direct ownership. If the ricketts sell the club and used revenues to pay down the debt then, yes, they are presently lying.

Now the only thing that makes the situation better is if the ricketts plan on Steinbrenner-ing it and not selling the cubs ever. Therefore the playing down of debt will allow for further investment, sooner, directly from the ricketts. In this scenario the ricketts have no interest in the equity of the investment other than what they want to borrow for renovations.

With this scenario it becomes a loop wherein the ricketts never actually take money out of the Cubs through the sale of the cubs and the increased equity position helps the organization.

cub2014

Brett you are right if they pay down their
debt it just means( if they were to sell)
then the ricketts would receive
a larger amount of cash. So yes every
dollar paying down the debt in the event
of a sale would increase cash at that time
to the shareholders (ricketts family)

But the value of a franchise is related to brand
probably more so than profitability. Most major
sports franchises typically increase in value.
So it would make sense to return cash to the
business to increase brand. Rather than pay
down debt (to acertain degree)

Either way profits end up in the hands of the
stockholders as they determine. If you make
$100m after paying interest expense and all
other debts. Rather than pay the taxes of
$40mil on the $100mil why not spend extra
$50mil on payroll only $20mil in taxes. So
you lose net $30mil in cash but gain $50 mil
in payroll.

Andy

I’m a CPA…and Brett is correct.

Stu

It really doesn’t matter what he does with the money. Why should a paying customer care?

If I go to a restaurant, do I care what the owner put in his pocket? I only look at the value of the meal for the money that I spent.

If a family drops $200 and has a bad experience, why would they go?

If another family drops $200 and has at least $200 of enjoyment, they will probably do it again.

Ricketts can do whatever he wants with his money. It doesn’t matter.

DarthHater

Right, because a professional sports teams is obviously just like every other business. (now where’s that damn sarcasm icon?…)

Cyranojoe

It doesn’t matter how he spends the money. It matters if he’s doing what he’s saying, or if he’s some form of a lie/half-truth. That’s the point.

kb

Here’s why it matters: because there is a proven relationship between “size of payroll” and winning. There are always exceptions, but every analysis I’ve read over the last decade points out that there is a CLEAR benefit to having a bigger payroll.

cubfanincardinalland

I would think that debt service is considered a normal team expense just as much as any players salary.
After watching this team throw their assets away on folks like Milton Bradley and Carlos Silva, it is a breath of fresh air to see management spend their payroll wisely, looking for value.

Still Love the Cubs

Brett, I got all excited when I saw the title of this piece. I was hoping it was the much teased, long awaited for article on the TV that you’ve been promising. I love your breakdowns and think you are usually spot on with the way you see things.

That said, let’s get this baby up already!

http://www.bleachernation.com Brett

Haha. Sorry. That one’s still coming. Probably before Opening Day…

ReiCow

Brett,

Have you ever considered using mathematical nested parenthesis? They are pretty nifty (and may add some clarity [loads of the same parenthesis can get lost in the shuffle {they did in your post (you missed a closing one) } ] ).

Considered, yes. But it looks so much less whimsical to me, which is at least part of the point.

Josh C.

I think that now i am very much in favor of what the FO is doin. They are basicly turning the Cubs into the Rays with payroll flexability. The only thing stopping the Rays from being World Series contenders every year is there lack of ability to add payroll. They are going to loose guys like David Price and Matt Moore while maybe being able to keep Evan Longoria. If the Cubbies right now had the Rays system; they could add larger contracts to fill the mix all the while keeping their own talent on the team. i think now i completley understand the “Vision” the FO has been talking about. I also get that they want to be sustainable for years; and I think that the CSN deal is going to kill them for awhile. Also these money hungry grubs “Rooftop Owners” are clogging up the system with political BS. I have been to hundereds of Cubs games in my life, never cared about the rooftops before they were there; dont care about them now!!!

matt ruefer

exactly. its a modified version of what the red sox did. and the system was created by billy beane in oakland. we keep a sustainable amount of prospects coming into the system and then have the money to lock them up long term creating the core. once the cores built, you then have wiggle room with free agency to go buy the best pitcher on the market. when the cubs become buyers, we will see the monster deals start, just like daiske from the red sox, and cc sabathia in new york. when this front office decides they are close you will see a slew of massive deals to maximize talent. it worked in boston. you do your best to remove as much variance as possible, then when you lose to variance, you know you did everything you could to minimize it, and you improve next year.

ozzzie19

Correct me if I’m wrong, but isn’t Ricketts a 25% owner in CSN? If so, is CSN revenue part of the “closed system”? If so, that should lessen the pain of not being able to put the CSN games out to bid until 2019.

Mick

I believe it’s only 5%.

TonyP

I would be surprised if Cubs generated revenue wasn’t being used for debt payments.

Carne Harris

Me too, sadly. If it does turn out to be the case, they’ll probably couch it in terms of solvency being important for the organization, but that’s a cop out.

Edwin

It’s fine if Tom Rickets is using the Cubs revenue for the debt payments, but if he is, then Tom is wrong about every dollar staying in the Cubs organization. The Cubs are an asset on the book, and the debt is a long term liability. If revenue from the Cubs is being used to pay the debt payments, then Rickets is lowering OE in the Cubs as an asset.

In detail, the Cubs would decrease cash and OE, which would lower the value of the Cubs (A-L) as an asset, which equals the lowering of the long term liability.

BTC

I agree with Mick, I think there needs to be some transparency within the financials for him to make those statements. It isn’t a public company, but the Cubs are one of the biggest franchises, and are not hurting for attendance or merchandise sales. I think with how many greedy executives their are out there, showing some transparency would go a long way. It would only prove, and remove any doubt that he is here to win.

Mick

Don’t get me wrong, I do still feel the Cubs are in good hands with the Ricketts. They seem to be intelligent owners with great ideas that will hopefully lead to WS championship. Also, I was agreeing with Brett that the Ricketts should be more transparent about certain things financial when making claims that all Cubs revenue stays in the baseball organization. It’s kind of like the saying, “mean what you say and say what you mean” and I feel that Ricketts isn’t doing that. He either needs to work on his message or his communication skills.

BTC

That quote pretty much sums up what my point was. I also think that the Cubs have the best front office they have had in a long time, and the Ricketts are really good for the team. It would just be nice, like you said, to be more transparent.

Jonathan

Paying down the debt with baseball money is a bogus move in my book unless they also increase the baseball budget each year based on the rise in franchise value. The value of sports franchises continues to rise at rates that are unavailable in other investments and as this happens the debt to asset ratio decreases independent of the pay down. There is no way that the interest rate on the debt is equal to the growth rate of the franchise value. Owners can lose money every year on their teams and they still will come out way ahead when they sell

bbmoney

I agree with the bogus move part. But ONLY because of what Rickett’s has told everyone about all baseball money staying in the team.

If he hadn’t said that, sure, I’d like him to keep all the money in the team. But I couldn’t call it a bogus move if he didn’t, he could do whatever he wanted…..maybe I wouldn’t be thrilled but there’d be nothing shady about it.

Carne Harris

Great point on how turning debt into equity isn’t really putting money going back into the organization. You should use your hentai-like tendrils of influence to get someone to ask Tom Ricketts if this is the case the next time he speaks to the media. That would be a quality news item right there.

matt ruefer

this example of saying the cubs is used to pay down the debt of the ricketts family is insane. thats how you buy an established business thats expensive. for example i have a lemonade stand that’s valued at 2,000 dollars and you only have 200 or 10% of the amount, you go get a loan to cover the rest and use the profits from your business venture to pay down the loan, until you fully own the company. then you go get another loan to expand, you expand the lemonade stand to a full bore lemonade shop. you use the profits of your lemonade shop to pay down the loan and then make money. the starter capital of the intial purchase is created by a loan to make the venture less risky. saying the debt to buy the cubs is not a debt owed by the cubs is insane, the owner has the debt thus the corporation has the debt. you must have any concept of how a business is ran.

http://www.bleachernation.com Brett

I don’t think you really understand the point being made, which has everything to do with the “every dollar goes back into the organization” narrative, and nothing to do with how one operates his business in the best way.

I’ve been around a sophisticated business or two in my day.

AP

But how many sophisticated Lemonade Stands have you been around?

DarthHater

I’d like my local lemonade stand to win a World Series in the foreseeable future, so I’ll just take an owner who has $2,000 to begin with, thank you very much.

Dave

That being the case would you tell your customers that every dollar that comes in will go toward your lemonade stand in the attempt to make it the best on the block meanwhile serving one of the worst lemonades.

Rebuilding

Of course Cubs revenue is being used to pay down debt unless this is unlike any other acquisition I’ve ever seen. Assuming the loan was approximately $600 million (no idea on the figure, just a guess based on purchase price) that would be $30 mil a year at just 5% interest. No way the Ricketts are writing that kind of check. And the poster above was also correct – no way they took on any kind of personal liability on the loan – the franchise itself is the collateral for the loan. It’s a good thought Brett, but I think Ricketts can get around it by saying that debt service is an operational expense. But your point still stands

CubFan Paul

They financed around $400M

http://www.bleachernation.com Brett

I think that’s absolutely what he would say (and then would get into a lot of what’s been discussed in the comments).

Jared Woodcock

This has been a very interesting topic with many different perspectives. However, it got me thinking about who should get/is getting the advertising money for signage at Wrigley Field. The Ricketts own Wrigley Field (not the Cubs) so all money for signage and advertisement at Wrigley Field should go directly to the Ricketts family. Not sure how realistic, but could the Ricketts be using that money to pay off the debt? Thus keeping their word about “all dollars going back to Cubs organization.”

cub2014

If they are the prime shareholders for however
many companies make up the whole cubs group
then they in the end control where the profits go.
“Money back into the cubs” you would think means
spending profits on day to day operations I.E. payroll,
scouting, renovations, facilities etc…

aCubsFan

Brett,

You are quite naive to think that the debt is in the name of the Ricketts family. More than likely the financing agreement was put in the name of the Chicago National League Ball Club, Inc. with Wrigley Field and all the related assets of the ball club used as collateral. Furthermore, the ‘cash’ that the Ricketts family put in to pay for the purchasing was possibly a loan form the family to the ball club, which will need to be repaid to the Ricketts family.

So, if they revenues generated by the club will stay in-house, they also will be used to pay off all debts of the corporation, just like any other corporation or sports entity.

Also, since the Cubs are a privately-owned company they have no responsibility to be any more transparent in their operations than what they want to be or need to be by MLB regulations, unlike public corporations.

http://www.bleachernation.com Brett

I can’t keep saying the same things. I’m not naive (in fact, I’d argue that I’m being the exact opposite of that). It’s not your obligation to search out all of my comments in a thread, but if you do see my comments in this thread, you will see my point.

AP

Brett, I think you should just throw your hands up in disgust at this point, crawl under the computer desk, and never come out. This has gone far afield of the point you were trying to make and it doesn’t look to be getting any better.

http://www.bleachernation.com Brett

It’s just an unfortunate thing this time around – the folks with whom I’m having this discussion are all very clearly smart people who understand these kind of business deals very well. I’m just trying to make a much simpler, 10,000 foot view point. Maybe for some, the point is too simplistic for me to articulate well. I know I’m right about the small point I’m trying to make. But I might never get there with some. So I’ll be glad when this post gets buried.

AP

Well, not to keep it from getting buried, but from an accounting standpoint your argument is very valid. Cash is being decreased and could be used to either increase an expense (like payroll) which reduces Rickett’s equity or, as you’re arguing, decrease a liability (namely, debt service), which increases Rickett’s equity. Is debt service an organizational expense? Yes. So, is every dollar staying in the organization? Yes. Is it really as benevolent as it sounds? No. If he’s using cash to pay down debt, which is absolutely what revenue generating companies are supposed to do, then he’s putting it toward something that, in the end, benefits him more than it benefits the on field product. So his comment, while accurate, is just not as altruistic as it sounds. Nothing more, nothing less.

http://www.bleachernation.com Brett

That it so, so very it. Yes. That.

Rebuilding

^^^^^This

cub2014

AP you are right a going concern (say in manufacturing)
if they want to improve their brand or value would take
profits and invest them into the company so they would
be more competitive going forward, like buying automated
equipment to increase profitability. In sports franchises
Smart payroll increases should produce greater profits
(higher ticket prices,greater attendance etc), assuming
smart payroll increases generate wins.

Tom A.

Or also in business if debt levels are too high, you pay them off when you can !

Tom A.

What person in their right mind is not trying to pay off debt (if they are able to pay off debt) during this period of low interest rates ? It is much harder to pay off debt when interest rates get back to 8%, 10% or 12%.

The Cubs are an investment — true ! Best way for that investment to pay off would be to win. Also, why is it difficult to understand that he also is a fan ? I actually think he wants the Cubs to win as much as me or any avid fan.

AP

I believe that about Ricketts as well. I think he wants to win. I also think he’s an excellent business man who is making the right move if he is paying down as much debt as possible right now (however, I think it’s likely the rate is fixed so it wouldn’t matter too much to him if rates rise in the next few years).
That’s just not the point Brett was trying to make, he was simply saying paying down that debt helps Ricketts more than the “accounting uninitiated” might be led to believe when Ricketts make his “every dollar stays in the organization” comment.
It’s like Newman’s salad dressing. They say every dollar of profit goes to charity, but there are many people in the world who don’t know the difference between revenue and profit and don’t realize that profit is AFTER the CEO gets his huge salary and bonuses.
Does it make Newman’s salad dressing horrible for “only” giving profit to charity? No. It just means there are people who may misinterpret the statement and not realize that the CEO could still be getting very wealthy off their purchases of salad dressing. Same here, Ricketts could be benefiting from this more than the financially unaware may realize. I’m sure he still loves his children and tries very hard not to eat them when he’s hungry.

cubsin

Just my opinion, but I would consider the interest payments on the loan to be a team operating expense and any reduction of the principal to be a benefit to the Ricketts family.

cub2014

interest is an operating expense and paying
down a loan increases owners equity.

Die hard

They will need an infusion of cash- should consider asking Warren Buffet to do a 7th inning stretch

Edwin

Maybe they could perform an elaborate heist where they pose as terrorists but instead are actually well dressed international bank robbers.

Jonathan

I think many of you are looking at the Cubs as if they are a regular business, which they are not. Number one, they cannot expand. There is no opportunity for a second hicago Cubs franchise. Two, there is no regular business that grows in value just by existing. The Ricketts purchased the Cubs for $700 million. The franchise value according to Forbes, as of March of last year was $879 million.

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